When I was teaching the Sonic Dealer Academy from 2001 through 2008, my co-instructor, Steve Hallock, became famous for asking each class, “Why do you think we spend so much time talking about the Service Department? It’s because, at a 75% gross profit margin on labor sales, this department offers, by far, the greatest incentive to increase sales. That was then, and many dealership owners and managers looked at service gross potential that way.
These days, however, I’m coaching my clients to also recognize the value of the “associated gross” that is developed when we increase service labor sales. I’m sure most of you grasp how adding 5 more R.O.s per month, increasing hours per R.O. by two tenths, and increasing the labor rate by $0.50 can increase labor sales. But most dealership owners and managers are absolutely shocked by the increased overall gross profit developed when we consider the “associated” sales.
What do I mean? After performing this exercise with hundreds of NCM Institute attendees, the faculty can, without question, attest that when the associated gross profit from parts, tires, fluids, sublet repairs, and shop supplies is added to the labor gross, each dollar of customer-paid labor sales is worth between $1.00 and $1.50 in fixed gross profit. Please do your own calculations to verify this!
Once the total gross profit improvement has been calculated, we need to consider those expense accounts that are likely to be affected by our proposed methods of increasing sales and gross. In doing so, we normally predict our incremental net profit retention to be in the 65% - 75% range. Using $1.25 in Fixed Gross per C-P Labor Dollar Sold and 70% Net Profit Retention as an example, each additional $1.00 of customer-paid labor sales will be worth $0.875 in net profit improvement. ($1.00 in C-P Labor Sales = $1.25 in Fixed Gross x 70% retention = $0.875 NPI.) Have you ever looked at it this way? Don’t you think you should?
This message is just a further demonstration of the Value First policy of Garry House & Associates! For a better understanding of “what we do and how we do it” go to https://www.ghaGPS.com/what-we-do.